BASF Report 2021 Management’s Report – Opportunities and Risks 157 Risks from metal and raw materials trading projects are suspended. Following the impairments recognized in interest rates used in discounting pension obligations leads immedi- In the catalysts business, BASF employs commodity derivatives for the third quarter of 2020, we currently consider the risk of further ately to changes in equity. To limit the risks of changing financial precious metals and trades precious metals on behalf of third parties impairment for assets such as property, plant and equipment, market conditions as well as demographic developments, and on its own account. Appropriate commodity derivatives are also goodwill, technologies and trademarks to be immaterial. The same employees have, for a number of years now, been almost exclu- traded to optimize BASF’s supply of refinery products, gas and applies to investments accounted for using the equity method, with sively offered defined contribution plans for future years of service. other petrochemical raw materials. To address specific risks associ- the exception of Wintershall Dea, which was remeasured at fair Some of these contribution plans include minimum interest ated with these non-operating trades, we set and continuously value in 2019. As the value of the shareholding is dependent on guarantees. If the pension fund cannot generate this, it must be monitor limits with regard to the type and volume of the deals expected oil and gas price developments, impairments of the share- provided by the employer. A permanent continuation of the low concluded. holding and of the assets held by the company are possible. interest rate environment could make it necessary to recognize pension obligations and plan assets for these plans as well. Liquidity risks Long-term incentive program for senior executives Risks from fluctuating cash flows are recognized in a timely manner Since 2020, BASF has offered its leaders the opportunity to partici- as part of our liquidity planning. We have access to extensive pate in a long-term incentive program (LTI program) in the form or a Strategic opportunities and risks liquidity at any time thanks to our good ratings, our unrestricted performance share plan. The LTI plan incentivizes the achievement access to the commercial paper market and committed bank credit of strategic growth, profitability and sustainability targets and takes Long-term demand development lines. In the short to medium term, BASF is largely protected against into account the development of the BASF share price and the We assume that growth in chemical production (excluding pharma- potential refinancing risks by the balanced maturity profile of its dividend. The need for provisions for this program varies according ceuticals) will be about as strong as that of the global gross financial indebtedness as well as through diversification in various to assumptions on the degree of strategic target achievement, the domestic product over the next five years and stronger than the financial markets. development of the BASF share price and the dividend. This leads five-year average prior to the coronavirus pandemic. Through our to a corresponding increase or decrease in personnel costs. market-oriented and broad portfolio, which we will continue to Risk of asset losses strengthen in the years ahead through investments in new produc- We limit country-specific risks with measures based on internally Until 2020, BASF offered leaders the opportunity to participate in a tion capacities, research and development activities and acquisi- determined country ratings, which are continuously updated to share price-based compensation program. The need for provisions tions, we aim to achieve volume growth that slightly exceeds this reflect changing environment conditions. We selectively use invest- for this program varies according to the development of the BASF market growth. Should global economic growth see unexpected, ment guarantees to limit specific country-related risks. We lower share price and the MSCI World Chemicals Index; this leads to a considerable deceleration because of prolonged restrictions due credit risks for our financial investments by engaging in transactions corresponding increase or decrease in personnel costs. to the coronavirus pandemic, an ongoing weak period in the only with banks with good credit ratings and by adhering to fixed emerging markets, protectionist tendencies or geopolitical crises, limits. Creditworthiness is continuously monitored and the limits are Risks from pension obligations the expected growth rates could prove too ambitious. adjusted accordingly. We reduce the risk of default on receivables Most employees are granted company pension benefits from either For more information on the corporate strategy, see page 26 onward by continuously monitoring the creditworthiness and payment defined contribution or defined benefit plans. We predominantly behavior of our customers and by setting appropriate credit limits. finance company pension obligations externally through separate Development of competitive and customer landscape Risks are also limited through the use of credit insurance and indi- plan assets. This particularly includes BASF Pensionskasse VVaG We expect competitors from Asia and the Middle East in particular vidual hedging strategies, such as guarantees. Due to the global and BASF Pensionstreuhand e.V. in Germany, in addition to the to gain increasing significance in the years ahead. Furthermore, we activities and diversified customer structure of the BASF Group, large pension plans of our Group companies in North America, the predict that many producers in countries rich in raw materials will there are no major concentrations of credit default risk. United Kingdom and Switzerland. To address the risk of underfund- expand their value chains in consumer-oriented sectors. In addition, ing due to market-related fluctuations in plan assets, we have the proliferation of large-scale digital marketplaces for chemicals Impairment risks investment strategies that align return and risk optimization to the could impact existing customer and supplier relationships. Asset impairment risk arises if the assumed interest rate in an impair- structure of the pension obligations. Stress scenarios are also simu- ment test increases, the predicted cash flows decline, or investment lated regularly by means of portfolio analyses. An adjustment to the